CLIMATE LITIGATION AND LIABILITY – THE IMPLICATIONS FOR ACCOUNTANTS
by John Purcell, Dr John Purcell FCPA, Policy Adviser ESG, Policy & Corporate Affairs, CPA Australia. John also sits on the Advisory Board for the Commonwealth Climate Law Initiative (CCLI)
Climate change poses a compelling risk to the economy. This creates a duty for company directors to adapt and safeguard the interests of their company, shareholders and stakeholders. However, legal clarification on their liability has been lacking.
To address this issue, the Commonwealth Climate Law Initiative (CCLI) has launched a series of research reports focusing on Australian, Canadian, South African and UK law. The reports articulate the legal basis for company directors to respond to and report on climate related risk, and set out the potential liabilities of failing to do so.
The reports show that company directors in the four countries must take action to address material climate risk, or face legal and reputational risk. The reports explain how directors could be held liable for failing to assess, manage and report climate risk, where it poses a foreseeable and material financial risk to the company. I recommend that all accountants read the reports to gain a better understanding of the potential risks that might be faced.
The accountant's role
The CCLI reports have significant implications for accountants. The impact of climate change risks on directors’ duties is both a challenge and an opportunity for the development and adaption of accounting practice.
Last year, thirteen CEOs from A4S's Accounting Bodies Network signed a statement of support for the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. This signalled the profession’s commitment to driving adoption of the recommendations.
The TCFD in the short period since the release of its recommendations in June 2017 has contributed significantly to raising awareness of the nature of both transition and physical climate related risks, and opportunities, and their translation into financial impact. Putting numbers to those impacts remains, however, a significant challenge, and one where accountants have an important role to play.
The CCLI reports should focus the attention of accountants on how they support strategic and risk management decisions. These decisions must take place with the expectation that reasonable directors will address climate related risks. The interaction of directors’ duties and accountants’ professional judgment in the realms of financial and auditing rules, and what is addressed through narrative and other emerging forms of external reporting, will without doubt be increasingly overlaid with climate risk governance considerations.
This is a watershed moment for accountants. The governance, measurement and disclosure of climate change heralds the opportunity, and indeed necessity, of greater convergence between the law and accounting centred on enabling the long term viability of companies and the robustness of markets in the face of pervasive impact of climate change.